Strong investment pushes growth up

By IBT Staff Reporter On 08/30/07 AT 9:14 AM

Robust business investment helped push U.S. second-quarter growth ahead at an upwardly revised 4 percent annual rate, the government reported on Thursday, the fastest pace since early last year but one that is unlikely to be sustained.

The Commerce Department revised its estimate of gross domestic product -- the measure of total goods and services output within U.S. borders -- up from a 3.4 percent rate that it published a month ago. That was in line with Wall Street economists' forecasts and far outstripped the first quarter's anemic 0.6 percent rate of expansion.

Since then, a credit squeeze that stems from rising default rates for subprime mortgages and that has disrupted financial markets worldwide has caused policy-makers and analysts to scale back estimates for U.S. growth in coming quarters.

There was scant evidence of any inflation problem in the second quarter. So-called core prices that exclude food and energy items rose at a low 1.3 percent rate instead of 1.4 percent as previously thought, down from 2.4 percent in the first quarter and the lowest since a matching 1.3 percent in the second quarter of 2003.

U.S. Treasury prices held steady at higher levels after the GDP data was released, while stock futures cut their losses but remained in the red.

Key sources of the upward revision in second-quarter growth were healthier business investment and a better trade performance than the department estimated a month ago.

Second-quarter growth was the most vigorous since a 4.8 percent rate in the first quarter of 2006.

BOOST FROM BUSINESS SPENDING

Businesses boosted their spending on expanded plant and equipment at an 11.1 percent annual rate instead of 8.1 percent, the strongest since the beginning of last year and far ahead of the first quarter's 2.1 percent rate.

Exports grew at a 7.6 percent rate instead of 6.4 percent previously estimated and compared with a slim 1.1 percent in the first quarter. Imports shrank at a 3.2 percent rate rather than 2.6 percent after growing at a 3.9 percent rate in the first quarter.

Consumer spending that is a mainstay of U.S. economic growth and that is considered threatened by the subprime mortgage crisis, increased at a 1.4 percent rate instead of 1.3 percent as estimated a month ago but that was well below the first quarter's 3.7 percent and was the weakest rate since the final three months of 2005.

The steady decline in the housing sector was evident in the revised GDP figures, which showed spending on housing contracting at an 11.6 percent rate instead of 9.3 percent -- a sixth straight quarter of falling spending.

Treasury Secretary Henry Paulson said last week that turmoil in financial markets stemming from rising defaults in subprime mortgage markets was likely to last for a while.

Paulson said the global growth outlook was strong and said that will buffer the United States from the worst impact of credit problems, even though U.S. economic performance will be affected.

Economic growth will be less than it ordinarily would have, Paulson conceded.

Leman Brothers said this week it was cutting its estimate for GDP growth to a 1.8 percent rate for the next several quarters, citing a faltering housing sector and rising risk that consumers will spend less on cars and other costly goods.

In a letter written on Monday and made public on Wednesday by New York Democratic Sen. Charles Schumer, Federal Reserve Chairman Ben Bernanke repeated the U.S. central bank was prepared to act as needed to mitigate the adverse effects on the economy arising from the disruption in financial markets.